advance pricing agreement overview of indian provisions & expectations ifa conference on...

Advance Pricing Agreement Overview of Indian Provisions & Expectations

IFA Conference on International Tax

06-07, July 2012

Mumbai

Vishweshwar Mudigonda

Deloitte Touche Tohmatsu India Private Limited

© 2012 Deloitte Touche Tohmatsu India Private Limited.

Contents

• Transfer Pricing Disputes and Resolution mechanism

• Advance Pricing Agreement

‒ Basic Features

‒ Framework in India

‒ Potential Roadmap

‒ Benefits and Challenges

‒ Vital Factors for Success

• Key Takeaways

2


Transfer Pricing Adjustments – Striking Numerals

Trend of adjustments over the years

•Seven years of transfer pricing audit completed – the trends indicate greater scrutiny, leading to increased adjustments and resultant litigation

•Facts and figures

3

Asst year No of casesCases

adjustedCases

adjusted (%)

Estimated addition (in

Crores)

2002-03 1061 239 23% 1,220

2003-04 1501 337 22% 2,287

2004-05 1768 471 27% 3,432

2005-06 1945 754 39% 1,614

2006-07 1830 813 44% 10,908

2007-08 2301 1,338 49% 23,237

2008-09 2638 1,343 52% 44,531

Source: White Paper on Black Money from Finance Ministry, May 2012


Historic TP Dispute Strategies Based on Unilateral Options

4


Recent TP Controversy Strategies Based on Bilateral Options

5


APA – Basic features

• Binding contract with one or more tax authorities‒ Covers specified intercompany transactions, pricing methods, and range of

target results‒ Generally five-year term (with rollback option) and can be renewed

• “Critical Assumption” clauses allow renegotiation in the event of changed circumstances

‒ Protects taxpayers from having to comply with a “bad deal” caused by material changes affecting their business

‒ Taxpayers have input in drafting critical assumptions

• Negotiations with tax authority APA/MAP specialists rather than examination teams

• Voluntary process – provides taxpayers with principled and non-adversarial alternative to resolving disputes

• Provides transfer pricing certainty, eliminate potential double taxation

6


APA – Legislative Framework (1/2)

• APA to be effective from 1July 2012

• Board is empowered to enter into an APA

• To cover prospective transactions

• Could cover determination of arm’s length price (ALP) or specify the manner in which ALP is determined

• ALP may be determined under any method whether prescribed or not

• Validity – Maximum period of five years

• Legally binding on both parties, except in case of any change in law or fact

7

Board to prescribe detailed rules, forms and procedure


APA – Legislative Framework (2/2)

• APA to be void in case of fraud or misrepresentation –regular provisions apply

• Tax authorities get additional time, in case APA is declared void

• Modified return have to be filed within three months for the past years covered under the APA

• Assessments / reassessments for the years covered in APA have to be completed in accordance with the APA

• Reporting Compliances during covered period

8

Pending APA – Compliance and audit to continue

© 2012 Deloitte Touche Tohmatsu India Private Limited

Phase 1:APA PlanningPhase 1:APA Planning

Phase 2:Pre-filingPhase 2:Pre-filing

Phase 3:APA Submission

Phase 3:APA Submission

Phase 4:Post-Submission Process

Phase 4:Post-Submission Process

Phase 5: Drafting and Compliance

Phase 5: Drafting and Compliance

• APA strategy

• Fact gathering and analysis

• Economic analysis

• Prepare pre-filing documents

• Pre-filing meetings with tax authorities

• Prepare and file APA request /submission

• Acceptance letter

• Receive/Reply to tax authority questions

• Second, third round questions

• Meetings with tax authorities

• Site visits

• Position Paper

• MAP negotiations

• Finalize APA and sign agreements

• Adjustments and APA annual reports

APA Process – Potential Roadmap

9


APA Phase 1: Planning

• Establish Transfer Pricing goals

• Prepare sound TP analysis

‒ Covered transactions‒ Function and risk analysis‒ Economic analysis

• Team building, information readiness

‒ Team with your internal stakeholders and with your external advisors‒ Leading practice: Internal project champion, liaison to business units‒ Prepare your “information supply chain,” go-to information contacts

10


APA Phase 2: Prefiling Conferences

• Pre-filing meetings allow taxpayers to informally obtain tax authority feedback before formally committing to the APA process

‒ May be on a named or anonymous basis

‒ May request more than one meeting as TP analysis is refined

• Goal - defines Transfer Pricing Methodology feasibility

• Tax authority informal feedback only a beginning, does not assure outcomes

• Sets a cooperative tone and builds relationship with the APA team

11


APA Phase 3: APA Submission

APA submission content• Begins with, but may not end with your transfer pricing documentation

• Often requires different information, different focus‒ Documentation looks back, APA forward (and back w/ rollback)‒ Looking at OECD Guideline perspective and home country perspective‒ Providing CA analysts negotiation alternatives

•On-point evidence and organization are crucial ‒ More is not better: On-point evidence crucial and builds credibility‒ Well-organized submissions read first, started earliest, easiest to process‒ Well-organized submissions mean fewer follow-up information requests

12


Phase 4: Post-Submission Process (Due Diligence)

• APA due diligence by the respective tax authorities‒ Follow-up factual questions‒ Site-visits‒ Discuss proposed TP method‒ Some of the above steps can be done jointly with both tax authorities

• Use case plans to keep the case moving‒ Contains due diligence milestones for both the taxpayer and tax authorities‒ Due dates are negotiated / flexible to accommodate business needs‒ Importance of keeping on schedule to keep case moving

• End result – preparation of negotiating position paper

13


Phase 4: Post-Submission Process (MAP Negotiations)

• Ultimate bilateral resolution is found in the Mutual Agreement Procedure (MAP) process

‒ Government-to-government negotiations‒ Results in a bilateral “Mutual Agreement” covering the terms of the APA

• Managing the MAP process‒ Communicate with both sides frequently‒ Getting on next MAP meeting schedule‒ Support both sides with information needed, clarifications‒ Propose settlement options

14


Phase 5: Drafting the APA and Compliance

• Drafting the contract with both tax authorities‒ Boilerplate APA‒ Understanding adjustment mechanisms

• Annual reports to demonstrate compliance with APA

15

© 2012 Deloitte Touche Tohmatsu India Private Limited

APA – Benefits and Challenges

Key Benefits

• A go forward TPM for at least 5 years• Rollback to open audit years possible• Significantly reduce penalty risk• Defers potential assessments and related

cash outlays• Provides certainty not otherwise available• Generally more objective / experienced APA

teams – avoid the “aggressive” auditor syndrome

• Entry into APA process reduces involvement of a local tax authority office and forces it to accept the APA methodology

• Greatly reduced TP compliance and audit defense costs

• Simplifies financial reporting process• Possibility of renewal at reduced cost• More latitude to negotiate with APA team in

order to obtain bilateral agreement

Potential Challenges

• An APA may focus scrutiny on other transactions in the structure and other issues

• Current transfer pricing policy may be perceived as too high or too low and could be reduced under an APA;

• No guarantee that proposed methodology will be agreed to

• Potential requirement to provide more information upfront

16


APA – Vital factors for Success

• Transparency and open minded approach during negotiation, both by tax authorities and tax payer

• Should embrace both unilateral and bilateral APA

• No limiting criteria for applicants of APA

• Nil or nominal formal filing fee

• Timely conclusion of APA – 6/9 months for unilateral and 12/24 months for bilateral

• Provide for roll back option

• Relief from compliance requirements

• Confidentiality of information must be maintained

17


Key Takeaways

• Provides certainty – reduces litigation

• Facts to be true and complete to the extent possible

• Offers greater flexibility in determining arm’s length price and latitude to negotiate

• Critical assumption to mitigate risk of major unforeseen events

• Co-operation rather than conflict leads to Win-Win approach

18

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms.

This material and the information contained herein prepared by Deloitte Touche Tohmatsu India Private Limited (DTTIPL) is intended to provide general information on a particular subject or subjects and is not an exhaustive treatment of such subject(s). None of DTTIPL, Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the “Deloitte Network”) is, by means of this material, rendering professional advice or services. The information is not intended to be relied upon as the sole basis for any decision which may affect you or your business. Before making any decision or taking any action that might affect your personal finances or business, you should consult a qualified professional adviser.

No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this material.

©2012 Deloitte Touche Tohmatsu India Private Limited. Member of Deloitte Touche Tohmatsu Limited

http://www.deloitte.com/about

advance pricing agreement overview of indian provisions & expectations ifa conference on...

Documents

transfer pricing adjustments

transfer pricing certainty

pricing methods

case apa

procedure slide

apa legislative framework

tax authorities

international tax